Friday, 29 August 2014

How do you mitigate a problem like a NIMBY?

I think I might have a partial solution to NIMBY blocking of urban intensification: a way of paying them at the margin for disamenity effects.

The one-line version: if your neighbour develops, your taxes drop.

Here's how we do it. Or at least the initial sketch-outline blog version of it. I'll expand on it later and, hopefully, fix the problems with it that you'll helpfully point out.

Consider a city of 10,000 dwellings and 12,000 households. Most of these dwellings contain one household, but some contain two households because there are more households than there are dwellings. The City collects $10,000,000 in taxes, with a $1,000 per-dwelling tax, on a standard Council rates system: the Council specifies how much money it needs to collect and that amount is apportioned across dwellings based on the relative value of the dwellings. Dwellings with higher total capital valuation pay more in tax. In this case, they're all identical for simplicity of exposition but nothing requires that they be identical or pay identical taxes.

Suppose that, in this set-up, somebody wants to put up an apartment building that would contain 100 dwellings to house 100 households. The developer pays Council a development levy that covers the building's interconnection costs: the costs the building imposes on Council. Since people would move into this building from existing overcrowded dwellings, there's no additional cost on Council of additional capitation-based services. Specify for now that each of these apartments has the same capital valuation as existing dwellings for simplicity, though again, that will vary in the real world. Council still needs to collect $10,000,000 in taxes in total to cover those services, so long as it's set the development levy correctly.*

Under the existing system, the $10,000,000 in taxes will now be spread over 10,100 dwellings rather than over 10,000 dwellings. Each dwelling consequently remits $990 in taxes. If the neighbours of the apartment building get more than $10 in disamenities from the apartment building's existence, they will lobby against its construction.

Now the RMA has some mechanism for identifying neighbours who are affected by the new development. Maybe some experience more traffic, maybe some lose a bit of view, and maybe others lose a bit of neighbourhood character. Specify that these effects, for this apartment building, extend over 100 dwellings in a circle around the new apartment building. Again, in the real world, it won't be a circle, but it doesn't matter. The RMA and Councils already have some mechanism for identifying affected neighbours; whatever that mechanism is has, in this case, identified these 100 dwellings.

Council needs to raise $10,000,000 in total, but nothing says that we need to spread the abatement provided by the new apartments to the city as a whole. In fact, on thinking about it, it seems pretty silly to spread the abatement so broadly. We've identified a set of affected neighbours who bear the costs of the new development but get the same tax abatement benefits as everybody else. Why not define a Special Ratings Area by the dwellings that experience disamenities from the new development, using whatever process is already in place for defining affected neighbours?

Let's instead specify that the total rates collected from both the new development and all the affected neighbours remains constant after the new development's construction. Those 100 dwellings used to remit, in total, $100,000 in taxes: $1000 each. Dwellings in the circle paid $100,000; dwellings outside of the circle paid $9,900,000. Outside of the circle isn't affected by the apartment building. We'll say now that all of the dwellings inside the circle, including the dwellings in the apartment building, have to remit $100,000 in taxes in total. Since there are now 200 dwellings in the circle instead of 100, the per-dwelling levy is now $500 instead of $1000. The dwellings outside the circle continue to pay $9,900,000 and the necessary $10,000,000 is collected in total. Now, neighbours would need to enjoy more than $500 per year in disamenity effects in order to wish to block the development.

This doesn't solve every problem in the world. There are neighbours who would experience more than $500 per year in disamenities and would still NIMBY up. But there will be a range of neighbours in the $10 to $500 range who cease their opposition.

If we wished a stronger counter-NIMBY effect, we could say that all dwellings inside the circle remit in total the necessary $100,000, but that the new apartments are levied at the rates that obtain outside of the circle. Only the affected neighbours then enjoy the benefits of the Special Ratings Area. The total amount collected will be the same. But, in that case, and in this example, the new apartments each remit $1000 in taxes while the 100 affected neighbours each see a complete rates abatement. So we would only hear complaints from NIMBYs experiencing more than $1000 in disamenity effects.

If the apartment development were large enough, and if the number of affected neighbours were small enough, one could imagine scenarios where the neighbours received a negative rates bill: had there been 150 apartments each remitting $1000 in taxes, and the same number of affected neighbours, there would have been $50000 in surplus to distribute among the 100 affected neighbouring dwellings: a $500 cash bonus each instead of a $1000 rates bill. In that case, it would take $1500 in disamenities to trigger NIMBY activity.

I doubt you would want that this be locked in in perpetuity.** I would expect we could see this system apply in the first year. Perhaps after 10 years, the circle as a whole, including the apartment, could remit a total rates bill equal to a half-way point between the total amount remitted inside the circle prior to the development and the total amount that would be remitted had every dwelling inside the circle, apartments included, paid the same amount as those outside the circle.

The steady-state for the circle going from 100 dwellings to 100 dwellings plus 100 apartment-dwellings could then be $150,000 in total taxes rather than $200,000. Prior to the development, the 9900 dwellings outside the circle remitted $9,900,000 in total taxes; now they'd only need to cover $9,850,000, so their rates bill would drop from $1000 each to $995 each. Each of the 100 apartments would remit the same $995 in taxes, covering $99,495 of the circle's $150,000. The remaining dwellings in the special ratings area would remit $505 each in taxes. Everybody's better off. Affected neighbours get strong abatement. Other pre-existing dwellings see a small amount of abatement too. And we reduce overcrowding because we have found a way of compensating the NIMBYs.

Now real world ratings systems are more complicated than this. More valuable dwellings remit more in tax. What I'm here establishing is a new Special Rating Area within which the city could apply its standard differential progressive capital value taxation scheme, charging more valuable dwellings a greater share of the amount that needs to be collected and less valuable dwellings a smaller proportion. It's just that instead of applying it over the city as a whole, they carve out areas around new developments as defined by the affected neighbours, and re-apply the standard apportionment formula to levy a total amount of rates across dwellings within that defined area. The rates bill for those in the area has to drop relative to what they pay in the current system, and NIMBY pressure consequently drops too.

Note further that these kinds of benefits should be stackable. If your dwelling is affected by two different new developments, you should see cumulative rates decreases.

Questions for readers:

Does a system like this apply anywhere in the existing world?

Are there obvious gaping holes that I'm missing?

What seems like a fair and politically sustainable time path for the special ratings area?

I'm sure there are many practical implementation issues like the calculations for dwellings in overlapping special ratings areas. And maybe we'd want gradations within the Special Ratings Areas where the most affected dwellings see the most abatement. But this all looks pretty feasible.

It seems like a good idea. Surely somebody has thought of this before. And surely somebody else has explained why it can't work. I'll look forward to your pointers.

* In the real world, they could under- or over-shoot. I've heard many arguments that Councils currently have incentive to over-shoot because doing so shifts the tax burden to new residents over existing ones and to discourage development to avoid NIMBY complaints. I can deal with the latter problem here, but we'll otherwise assume that the developer levies are set correctly.

** And especially where new dwellings might cater to new residents rather than for a shuffling of existing ones: the Council's total budget then has to increase for services that have a per-capita cost, and we don't want to give those outside the circle strong reason to lobby against the new development.

21 comments:

I think just about any direct, visible monetary "cost" or "benefit" to more development would lead to a lot more development, almost regardless of how you set it up. It's just too easy to blanket-oppose everything new for nebulous reasons when there isn't an expense in your face for doing it.

Interesting idea Eric. I think many cities do something along these lines, but not using lowered taxes to get NIMBYs on board, but increased public amenities (e.g., greenspace or parks, wider sidewalks, etc.). In many instances they just force the developer to provide these in-kind; however, in Vancouver the city collects (in addition to development cost charges) a "Community Amenity Contribution". Although I have heard complaints that the CACs just go into the black box of general city revenues and there is no observable link between a CAC payment and increased provision of amenities in a particular neighbourhood.

Speaking from experience, the majority of opposition to development generally come from the well-off/ well-connected who can afford to take projects through hearings and to the Environment Court, some reductions in rates seems unlikely to appease these types of people. In terms of gaps, your proposal also essentially excludes those projects which would be fully notified (not just to adjacent properties) or when notified to adjacent properties and/ or special interest groups (e.g. Heritage NZ). These interest groups or members of the general public far removed from any development would not receive any incentive from allowing a development to proceed.

Yes. The relief transfers. The full relief schedule is part of the rating bill that the owner gets quarterly. Maybe along with any adjustments for new developments that are proposed in the neighbourhood as indication of the savings that then could obtain if only the owner decides not to object.

But aren't the NIMBYs being compensated already? As I say over at TVHE

"f having the covenant and thus no intensification is valuable then buying a housing without said covenant will cost you less than buying the same house with a covenant and thus is the price difference not compensation for the possibility of intensification?"

Transitional gains trap. You lock in the returns from cheap, then yell as though there's a covenant. Since the political process responds to that, and since yelling is costless, people yell. Pay them for not yelling and things might change.

I think the principle is fine, but there's a lot of simplification going on here (you'll say that's necessary, but work with me). Contained within those 'services' are a wide range of different identifiable services which are provided by a mix of local, state and national entities, as well as the private market. I wouldn't smear them all together, but rather build a full cost reflective tariff mechanism for each one of those services from a bottom up and then if you wanted, offer an offset payment back for specific parties you want to compensate.

One of the reasons I say this is that each one of those services will have different cost drivers. Some will be volume dependent, others up front, others time, or other random (and probably unforeseeable) cost drivers from a top down charging system. Like rubbish collection for instance: specifically how does the addition of one jumbo apartment building influence the per capita cost of rubbish collection? It might be much cheaper than the per capita suburban unit cost - or more expensive for some unforeseen reason. Alternatively, perhaps the transport cost disamenities are huge in comparison (traffic is now a nightmare, and there's no viable way around it). Rather than using one top down simplified charging mechanism which may or may not accurately reflect a bundle of other specific factors, I think it's better to build up a set of charges from their specific components.

The other reason is that there's no such thing as an economically efficient expenditure from general revenues. There is a politically efficient expenditure - but that's different. Devolving the charges to different entities makes that politically motivated smudge more difficult. And then your disamenity refund payment is more transparent, at least then you know what it's paying for.

Ryan, perhaps I am missing your point, but Eric is proposing a discount targeted at reducing a single problem, which is the rational resistance of immediate (or close) neighbours of proposed development. Eric is not, as far he has said, proposing to reprice all services from first principles. This is reducing a political problem, with efficiency the byproduct.

1) I doubt the assumption that the city contains too many households per dwelling, and that the reason they don’t move is the lack of dwellings.2) More likely that new households will be formed by people not currently in the city3) This implies population increase and additional costs for council, so total tax needs to increase4) If tax doesn’t need to increase then there is some logic to payments etc. in an SRA.5) But it seems that tax is being used for the wrong purpose. Tax is to fund the city operations, not as a means to allow developers and NIMBYs to agree to a development.6) If $X is appropriate to get NIMBYs to agree to a development, then they should be paid that directly by the developer, and all taxes should be unaffected7) Councils could create a regime to create SRAs, and apportion disamenties to households in those areas, but why include it within the tax system?8) Creating a system that put an accurate value on the range of possible disamenities would be a massive challenge. Putting a value on it based on solely on distance from the development would be easy, but not fair.9) Would there be recognition of the change in value of amenities included into the compensation.

5) But it seems that tax is being used for the wrong purpose. Tax is to fund the city operations, not as a means to allow developers and NIMBYs to agree to a development.6) If $X is appropriate to get NIMBYs to agree to a development, then they should be paid that directly by the developer, and all taxes should be unaffected

We can argue what the purpose of tax is and who should pay, but here's how levying developers to buy out neighbours in brownfields will play out: brownfields development will either stop if this is made a requirement, or if developers can choose not to pay, they won't. These outcomes are partly because of liquidity constraints, but mainly because the final product has to compete against existing housing, and against new housing built in greenfields. If developers pay, either nothing changes from status quo, or housing supply is made worse.

The rating base is increased by this system over time, albeit with a lag.

Local taxes can be justified as funding mechanism for at least two reasons. First, it is solving an externality problem, and externalities are the preserve of government: NIMBYs create inelastic housing supply, that spills over at a national level in volatile house prices, and greater demands on central govt for relief. Second, it is giving effect to a local govt policy of densification, and therefore an appropriate use of public funding.

Don't get lost on the detail. This mechanism will be imperfect and cannot be made to price everything. I don't think that's the goal. It is an improvement if it buys a more liberal political equilibrium. We already have overs and unders (mostly unders).

My point is that there are financial costs (for specific services) which have real cost impacts both up front and on an ongoing basis, and then there are also the shadow priced disamenities (light, noise, crowds, and whatever else), and you don't want to go financing transfer payments for non cashflow disamenities by mucking up the financial payments system. The tariff systems in those financial costs drive behaviour too, and those tariff systems should be designed to drive economically efficient decisions.

The other point is that getting the financial costs right may well drive down the NIMBY behaviour anyway. If I as a new developer am paying the financial impacts of (say) the increased traffic on my neighbours and the incremental costs for new traffic infrastructure, perhaps I'm less inclined to build there, and will build somewhere else with less traffic problems to begin with.

Can't fault the principles you're putting forward, but it seems to me a different issue, and one that councils may not be able to solve, since price distortions will themselves be the product of NIMBYism and possibly effectively insurmountable for councils that appear vulnerable to pressure from upset homeowners. Getting the pricing right is consistent with this proposal.

Actually I'm not sure on second thought whether it makes sense for relief to transfer. It cannot transfer to other councils, presumably, (if not for technical constraints, then just straight political constraints of side payments to other rate payers) which in some cases is going to become pretty arbitrary e.g. Tauranga/Eastern Bay of Plenty. Seems to me simpler all round if relief is tied to a property. Sellers will be sure to let potential purchasers know.